FACTORMARKET

Requires that the following conditions be met mpp 1 p

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requires that the following conditions be met: MPP 1 /P 1 = .......... MPP n /P n, where the numbers stand for the different factors. Q L W MR

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- 4 - If MPP L /P L > MPP K /P K , the firm buys more labor and less capital. As it happens, the MPP L falls, and the MPP K rises, bringing the 2 ratios in line. THE LABOR MARKET Shifts in the Firm's MRP, or Factor Demand Curve The firm's MRP curve is its factor demand curve. MRP=MR x MPP. Since for a product price taker, P=MR, → MRP=P x MPP Note also that a change in MPP will also shift the MRP curve. e.g. MPP↑ → MRP↑ (rightward shift) Market Demand for Labor Normally, we would expect the market demand for labor to be the horizontal summation of the firm's demand curves for labor. However, this is not the case. Assume there are only two firms, A & B, that make up the buying side of the factor market. Also assume that the product price for both firms in P 1 Q L W MRP 3 MRP 2 MRP 1 (\$8) (\$10) (\$12) W 1 Q 1 Q 2 Q 3 MRP C (P 2 ) Q L W MRP A (P 1 ) W 1 80 100 MRP A (P 2 ) W 2 FIRM “A” Q L W MRP B (P 1 ) 130 150 MRP B (P 2 ) FIRM “B” W 1 W 2 Q L MRP C (P 1 ) 250 210 FIRMS “A + B” W 1 W 2 180 D
- 5 - Starting at a wage rate of W 1 , firm A purchases 100 units of labor. Firm B purchases 150 units of labor. If we horizontally sum the MRP curves for firms A or B, we get the MRP curve in (C) where the two firms together purchases 250 units. Now increase the wage rate to W 2 : In (C), firms A and B move up the given MRP a+b curve and purchase 180 units of labor. This may seem to be the end of the process, but of course, it is not. A higher wage rate increases each firm's cost and this shifts its supply curve leftward. This leads to an increase in product price to P 2 . If price rises, so does MRP; thus, each firm faces a new MRP curve at the wage rate W 2 . The firms together now purchase 210 units of labor. The Elasticity of Demand for Labor It is the % change in the quantity demanded of labor divided by the % change in the wage rate. E L = % ∆ in Qd L % ∆ in W Elastic, Inelastic and Unitary Elastic demand of labor (discuss) Determinants of elasticity of demand for labor 1) Elasticity of demand for the product that labor produces, The higher the elasticity of demand for the product, the higher the elasticity of demand for the labor that produces the product; and vice versa 2) Ratio of labor costs to total costs: Labor costs are a part of TC. The higher the labor cost to TC ratio, the higher the elasticity of demand for labor (the greater the cutback in labor for any given wage increase) and vice versa.

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